As per the core Reading: Revision risk refers to the risk of adverse variation of an annuity’s amount as a result of unanticipated revision of the claims process, and is intended only to cover genuinely reviewable annuities, not those that are index-linked. The sort of ‘genuinely reviewable annuities’ being referred to in the revision risk definition are annuities that arise from non-life insurance claims (eg accident insurance) where there is a risk that the annuity amount might change (eg due to a change in the health of the injured person or a change in the legal environment). Could you please explain this concept in more detail? Is this risk only applicable on the annuities?
Yes, I can't think of any other products where this would be relevant. This type of annuity is more linked to non-life (or general) insurance, as is indicated in the course notes. If you wanted to read further about them, then there is a lot of general information available online about this sort of product: they are often called 'structured settlement annuities', so try searching for that. Revision risk is basically the risk of the amount of annuity changing, for reasons such as those listed in the statement that you quote.
So I think we would be safe to assume that on life insurance products, unless there was specific accident insurance included as an additional benefit, then there would be no revision risk? thank you
That sounds fair - just watch out for any situations where there might be some kind of reviewable annuity benefit. [Also bear in mind that standard personal accident insurance cover would typically not pay out in the form of a reviewable annuity.]
For example, if the reviewable annuity benefit was at the option of the p/h rather than through inflation adjustments?
Hi - I think you might be misunderstanding what is meant by revision risk or the reviewable annuities that it relates to. I'm struggling to get my head around a product design whereby the p/h would be allowed to change their annuity benefit once it was in-force: surely they would just increase it to the maximum possible, as they have already paid the single premium for it? So I'm not sure what would be meant by 'if the reviewable annuity benefit was at the option of the p/h'. As I mentioned above, this is fundamentally about 'structured settlement annuities': those that are awarded by a court as compensation in relation to someone who has been involved in an accident (or similar) arising from some form of negligence. The annuity might be awarded on the basis that the amount could be varied in future, for example due to a change in the health status or level of incapacity of the individual (or there might be legal changes that could impact the benefit amount, for example changes to the rate at which the amounts would be required to increase or introduction of / increase to a minimum award level). The risk of the annuity benefit amount changing is represented by the 'revision risk' component of the SCR.
Thank you. I was trying to think of a situation where this might be the case for life insurance. But I think what you were saying, is look out for situations in the exam where such a benefit might be relevant! Sorry.
Like revision risk I am struggling to come up with an example of intangible asset risk. Given the asset must be intangible, but also that there must be an active and liquid market in which the intangible asset can be traded, are there any examples that are relevant to life insurance? Thank you
As we state in the course notes, intangible assets (typically things like intellectual property and brand value) are unlikely to have value in the Solvency II balance sheets of life insurers, so not something to be concerned about for SA2.
